Iron ore prices are down sharply in February ahead of the Lunar New Year Festival starting February 11.
Usually prices remain firm ahead of the week long break as steel mills stock up to see through the holiday and for a couple of days after.
But prices are down thanks to reports of slowing demand, tightening steel margins and weaker demand for product, especially rebar where Chinese trading groups report that Hot Rolled Coil steel is now in greater demand and selling at a small premium to rebar (which is used by the building and construction sectors and is the biggest selling steel product in China).
Last week 62% Fe iron ore was trading near multi-year highs of $US170 a tonne while 65% was at $US190 a tonne.
Tuesday saw the price of 62% Fe fines fall under $US150 a tonne for the first time in several months. The price settled at $US149.80, down 4.6% or $US7.27 a tonne on the day.
The price of 65% Fines (mostly from Brazil) fell $US7.50 to $US173 a tonne.
Both are down from most recent highs. 62% Fines peaked in mid December around the $US176.40 a tonne – a 9 year high. The price of 65% fines peaked at $US195.30 in mid January.
But the fall is also being blamed on another factor – the Chinese government’s new policy which calls for the size of the steel industry to shrink over the next five years (the 14th five year plan!) for environmental reasons.
The call came at the end of December for the industry to reduce its crude steel output in 2021 is part of low-carbon initiatives under China’s 14th five-year economic plan for 2021-25.
China has shut down 150 million tonnes of annual production capacity from 2016-2020.
The governments wants the top 10 producers to account for 60% of capacity. Baowu’s Shandong Steel takeover is part of that consolidation process.
China’s steel sector, as an energy-intensive industry, “must resolutely” reduce steel output to ensure a year-on-year decline, MIIT minister of industry and information technology Xiao Yaqing said during a 28-29 December work conference, according to state-owned media Xinhua.
From 2021 the Ministry will promote low-carbon initiatives and green projects, increase efforts to reduce steel output and issue new rules for steel sector capacity replacements.
The government raised the replacement ratio for new capacity to 1 to 1.5 from 1 to 1.25. In other words the amount of old capacity to be closed will now be 1.5 tonnes for every tonne of new, green, low emission capacity added.
This is aimed at getting rid of older, high polluting plants and replacing them with lower emitting ‘greener’ operations – this will be done via administrative orders and encouraging the takeover of smaller, weaker companies by larger players such as the world’s biggest steelmaker, Bawou
So what’s this mean for Australia’s iron ore exporters – Rio, BHP and Fortescue and the smaller operators?
Well, if productive capacity starts reducing then demand for lower quality ore – 58%Fe fines to start with – will fade quickly.
Steel mills are now blending 62% ore with 65% (the price of 65% fines has fallen less than the 62% price in recent days) to lower costs.
Closing capacity and looking to make steel plants greener will raise demand for 65% ore (most of which comes from Brazil) and some 62% fines from Australia.
Finally, what is interesting about the new policy is that the conversion ratio for replacing blast furnaces with more green capacity remains unchanged at 1 to 1. The government didn’t look to boost other production forms (less polluting) – such as electric arc, Hismelt, Finex.
The government wants the big state-dominated blast furnace based producers to change, not to become smaller users of other technologies.
And Australian iron ore producers could be intended victims (because China resents the overdependence on them for supplies of this commodity).
